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4 Private Housing Finance - Coggle Diagram
4 Private Housing Finance
Urban Housing Crisis
Rent squeeze
Fewer families can buy a house
Many people squeezed out of urban housing market
Urban homelessness increasing
Near homeless today are becoming tomorrow’s homeless
Morgages
Securitization
Pooling Mortgages: Banks or lenders take a bunch of these individual mortgages (cookies) and put them together into one big group (like a big cookie jar).
Creating Securities: They then make these into little pieces of paper called securities. Each piece represents a small part of the whole cookie jar.
Advantages
Reduces asset-liability mismatch
banks get cash when they need it so that they can borrow further and are not dependent on each borrower to pay in time
Lower Capital Requirement
When a company securitizes its loans, it can often treat them as sold. This means they don’t need to hold as much capital against the loans, allowing them to stay within legal or regulatory limits and potentially lend more money.
Locking in Profit and Risk Transfer
The bank locks in their profit by selling notes to the investors and the risk in case the loan payer doesn't pay goes after the investors and not the bank
Portfolio Diversification
Bonds are not correlating with other investments and are therefore a good tool for diversification
3 types of securities
Collateralised Debt Obligations (CDO)
A mixed investment tool that combines various debts into one package to spread risk and diversify investments. (Can include bonds, MBS etc)
Morgage-backed Security (MBS)
A way to invest in home loans by pooling them together so investors can earn from homeowner payments.
Credit Default Swap
The Toxic waste - B CDOs gets borrowed
bank pays an insurance company so that in case the bank doesnt recieve the money back the insurance pays them
the
Selling to Investors: These securities are sold to investors, like selling tickets for people to own a part of the cookie jar. Investors now get a share of the money that comes in when homeowners make their mortgage payments.
Subprime morgages
Subprime borrowers have a heightened perceived risk of default, such as those who have a history of loan delinquency or default, those with a recorded bankruptcy, or those with limited debt experience
3 Concepts
Secondary mortgage market
is the market for the sale of securities or bonds collateralized by the value of mortgage loans.
Subprime mortgage market
includes the primary mortgage and secondary mortgage markets which relates to mortgages with higher risks on repayment.
refinance
a housing asset for a second time in primary market
Fannie Mae
does not make home loans directly to consumers, but uses secondary mortgage market to facilitate liquidity in the primary mortgage market thereby ensuring that funds are consistently available to the institutions that do lend money to home buyers
reverse mortgage
straigh reverese mortgage
get some money for short term and then repay back
annunity mortgage
get a lump sum at the begingin and then monthly instalments for the rest of your life
Black Swan Phenomenon
Predictibility models count these events in to have a higher predictibility power
The Housing Bubble
Subprime mortgage crisis
banks borrowing money to risky borrowers
people thought even if they could not pay off their loans they coould sell their property
property prices dropped
people wouldnt find buyers to buy their property
they could not pay theyre loans
securities prices fell and financtial institutions suffered
started in 2008
1 more item...
Default (ppl were not able to pay)
foreclosure - meaning bank taking their property
Mortgage underwritters
determine the risk
credit rating agencies
agencies are payed by banks whos interests are to sell the securities they are evaulating
Major causes
Mania for home ownership
Historically low interest rates
Risky mortgage products and lax lending standards
Speculative fever
securities allowed everyone to invest in the housing market
once the crisis started there was no liquidity
7 Steps
housing bubbles
surge in defaults and foreclosures
house price fall
price of MBS fall
loss of financial istitutions
Finnancial institutions are trying to pay off their debt by selling assets including those mortgage based MBS - this drives the price of those assets down - no one trust down and so no one buys them anymore - lack of liquidity
2 more items...
Sources of financing private housing
direct
contractual financing
deposit banking
mortgage banking
new to china
fixed
dis/advantages
Repayments stay the same regardless of interest rate increases.
Easier to budget because repayments do not change.
Repayments do not decrease when interest rates decrease.
You can’t pay off lump sums or increase your monthly repayments.
If you switch mortgage to a different rate, to a different provider or repay it early you will pay a fixed rate penalty.
adjustable
dis/advantages
Repayments may fall when interest rates fall.
You can increase your repayments.
You can pay off lump sums.
You can apply for a payment break/holiday.
The margin is less on a tracker rate or Loan to Value (LTV) rate when your LTV is lower.
Repayments may increase when interest rates increase.
More difficult to budget for repayments because of uncertainty with rates.
